A Combination of Changes Can Improve an Individual’s Retirement Outlook

Noting that nearly half of Americans have nothing saved for retirement and the median 401(k) balance is less than $10,000, Morningstar set out in a new report, “Easing the Retirement Crisis,” to figure out how people can better position themselves for a successful retirement.

Morningstar analyzed eight changes people can make to build a more secure financial future. These fall into three categories: financial planning (adjusting one’s standard of living in retirement, delaying retirement and increasing contribution rates), investing (increasing net returns from investing and using a more aggressive asset allocation) and investor behavior (signing up for increased contributions over time, starting with a larger amount of savings and choosing whether to invest one’s savings at all.)

The analysis ran 400 million simulations in total: 3,916 households in a nationally representative sample, across 100 scenarios in which the households change contribution rates, their retirement ages, or other aspects of their financial lives, across 1,000 randomly determined market scenarios.

Morningstar found that under normal market conditions, 25.6% of the working population is likely to have what they need for a starting savings balance at retirement. Under bad market conditions, 18.5% would have what they need.

Among mass-affluent households, i.e. those with more than $100,000 in investable assets, 45.3% would have the retirement savings they need under normal market conditions. Under bad market conditions, this drops to 32.2%.

For both the general public and mass-affluent households, saving more, choosing to invest one’s savings, delaying retirement and lowering standard-of-living expectations have a far greater effect on one’s retirement outlook than asset allocation, reducing fees or achieving alpha.

For each individual action, extreme changes, like a 20% increase in contributions, are needed to move a household into a comfortable financial place. However, if less extreme changes are combined, they can be quite effective.

For example, if Americans delayed retirement until at least age 67 and contributed at least 6%, the percentage of households having what they need would jump from 25.6% to 71.2%. For mass-affluent households, these two changes would boost their retirement readiness from 45.3% to 72.9%.

Morningstar notes that what works varies by household; therefore, personalized advice is important.

More about Morningstar’s research is here.